What is wrong with the US economy?

[Art]

There must be more to this. I should be so lucky as to have $26 billion more in assets than liabilities. Perhaps they carry non-performing assets on the books.

That's the crux of the problem a huge slice of the assets they carry on their books are mortgages on properties whose market values are now far below their paper value. At least 54 billion fall into this category.

 

[Jimmy Snyder]

That's the crux of the problem a huge slice of the assets they carry on their books are mortgages on properties whose market values are now far below their paper value.

You just did a better job of reporting than the WSJ.

 

[Jimmy Snyder]

Given the direct connection between the financial institutions and businesses which between them are the economy this is like saying the Titanic is sinking but my cabin has never looked so well so everything must be okay.

Claiming that the entire economy is doing poorly is like saying there's water dripping in one of the cabins, I must be on the Titanic.

 

[Art]

Claiming that the entire economy is doing poorly is like saying there's water dripping in one of the cabins, I must be on the Titanic.

To complete the analogy the fall of Lehman's is the tip of the iceberg. Many banks are hiding their exposures to high risk mortgage based securities hoping desperately real estate prices will recover quickly thus allowing them to avoid having to realize a loss. This has led to a bit of a guessing game where folk try to predict who exactly is carrying the highest levels of 'bad' assets leading to the next domino falling which in turn puts additional pressure on any other institution seen to be financially tied to them.

Nobody should underestimate the importance of the financial institutions to the economy. The credit they supply and the deals they broker along with the other instruments they sell are the lifeblood of the economy. As an example many pension funds are integrally linked with the performance of these banks and so people's incomes are at risk which means the economy is being attacked both on the supply side - the credit crunch, and on the demand side - consumer spending, as consumer confidence falls; all of this exacerbated by high energy and high food prices.

As individual banks try to insulate themselves by refusing loans to other financial houses, businesses and personal loans things will just keep getting worse on both fronts. Car production has always been seen as a barometer of how the economy is faring and as noted in an earlier post car production is plummeting which may well be an ominous sign the dam, already seriously cracked, is about to break.

Is a major crash now inevitable? I don't know but people like Alan Greenspan, who said yesterday this is the world's worst financial crisis in a century, are very pessimistic.

 

[Gokul43201]

Many people are refusing to accept that pretty much the entire rest of the economy is doing great.

Here's what I've found:

SECTOR              ANNUALIZED CHANGE
                    1-YR         3-YR     
----------------------------------------------
Airline            -44%          -14%                     
Computers          -17%          +03%          
Pharma.            -12%          -01% 
Transport.         +05%          +10%         
Telecom            -26%          +04%          
Utilities          -11%          +05%
----------------------------------------------

And here's an average over the non-finance sectors, from the http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm.

The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies.

Nasdaq-100     -15%        +4%

Only the transportation sector has shown any growth in the last year, and that's also the only sector that has shown a modest 10% growth rate over the last 3 years. I don't see how the rest of the economy doing "great"?

http://moneycentral.msn.com/investor/market/usindex.aspx

And that's what I like about the current situation. In previous times of misdeeds by financial companies, the misdeeds took down the rest of the economy. This time, they are in it alone.

Along with every single taxpayer in the country that is propping them up. How many of those previous times involved the Government taking over a giant chunk of an entire sector?

It will be interesting to see if or how far the Dow and stock markets plunge. If there is a lot of cross investment, this could be the beginning of a crash!

How far? I think you mean IF.

I think he did say "if".

The Dow is almost exactly 20% below it's 52 week high, which is the definition of a Bear Market, but it is nowhere close to what happened in the last few bear markets. And it is two months since it hit that low and it has been remarkably stable - and up 6%.

Looks like it's less than 2%, right now.

 

[mheslep]

... I don't know but people like Alan Greenspan, who said yesterday this is the world's worst financial crisis in a century, are very pessimistic.

No, he did not.

http://www.reuters.com/article/etfNews/idUSN1440268220080914?pageNumber=2&virtualBrandChannel=0

"WASHINGTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan on Sunday said ...

I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring...

 

[quadraphonics]

Everyone knows and accepts that the financial and construction sectors are in turmoil right now. Many people are refusing to accept that pretty much the entire rest of the economy is doing great.

Well, that's a bit like saying "sure, the engine and transmission on this car have fallen out, but the tires are in great shape! And just LOOK at these power windows!"

But, seriously, I don't know where you get the idea that other sectors are doing great. Retail spending is way down. Unemployment is up. These are unambiguous signs of systemic weakness in the economy.

 

[Gokul43201]

No, he did not.

http://www.reuters.com/article/etfNews/idUSN1440268220080914?pageNumber=2&virtualBrandChannel=0

"WASHINGTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan on Sunday said ...

I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring...

Phew! What a relief!

Psst: Did you remember to update the counter?

 

[Ivan Seeking]

No, he did not.

http://www.reuters.com/article/etfNews/idUSN1440268220080914?pageNumber=2&virtualBrandChannel=0

Okay, a once in a century "type" of crisis. Does this somehow diminish the significance?

Asked whether the crisis, which has seen the US government step into bail out mortgage giants Freddie Mac and Fannie Mae, was the worst of his career, Greenspan replied "Oh, by far."

http://www.breitbart.com/article.php?id=080914181841.fsmkqu8s&show_article=1

Now what we need is more deregulation.

It is beyond me that anyone associates the Republicans with prosperity. There is no evidence for it.

Late edit: Funny!

Sitting behind McCain was former Gov. Jeb Bush, who was hired a year ago by Lehman Brothers as a financial consultant.

http://www.miamiherald.com/news/politics/story/687007.html

 

[Art]

Ben Bernanke made his name through his analysis of the Great Depression. He is of the school of thought that the catalyst for the Great Depression was the credit crunch of 1929-30; itself brought on by the massive unsecured debt held by banks and the subsequent downward spiralling, depreciating value of the banks assets.

As the banks capital base diminished so did their ability to lend and as they could not lend property prices and consumer demand fell further leading to even lower property prices and less consumer demand thus more defaults from businesses, more unemloyment and so even less capital for the banks and so it continued etc etc

Financial conditions today seem remarkably similar to back then.

 

[mheslep]

... I don't know but people like Alan Greenspan, who said yesterday this is the world's worst financial crisis in a century,

Phew! What a relief!...

Meaning what, sarcasm aside? That I said everything is fine, no worries? Not here.

Psst: Did you remember to update the counter?

That's per Mr Greenspan not me. I think he's right in the short term.

Okay, a once in a century "type" of crisis. Does this somehow diminish the significance?

Yes, the statements are radically different. To say this is the 'world's worst financial crisis in a century' one must overlook the history of the great depression, 70's stagflation, and so on. Jobs, income growth, GDP growth, liquidity, bank failures, home foreclosures, stock market, or global effect - none of today's news even approaches the 1930's figures per capita. What is unique (as in 'type') here is the amount of resold home mortgage securities held by wall street investment banks - that has never happened before in US history.

 

[Art]

That's per Mr Greenspan not me. I think he's right in the short term.

meaning you think the century Greenspan referred to starts this year and he's indulging in a little astrology? If you watch the interview he also stated it's the worst financial crisis he has ever seen. Presumably he wasn't referring to what he saw in his crystal ball but in his long career. http://abcnews.go.com/video/playerIndex?id=5798760

Yes, the statements are radically different. To say this is the 'world's worst financial crisis in a century' one must overlook the history of the great depression, 70's stagflation, '97 Asian economic problem, and so on. Jobs, income growth, GDP growth, liquidity, bank failures, home foreclosures, stock market, or global effect - none of today's news even approaches the 1930's figures per capita. What is unique (as in 'type') here is the amount of resold home mortgage securities held by wall street investment banks - that has never happened before in US history.

Not at all, you are confusing financial crisis with economic crisis though it is likely the former will lead to the latter. It was the financial crisis of 1929 that led to the Great Depression of 1933 so plenty of time for the rest of the indicators to line up. So far it is only at the phase of financial crisis and so there is no need to include your other indicators related to an economic crisis in order to draw a comparison between today's problems and with previous financial crisis over the past hundred years.

For the US the fall in the dollar has boosted exports which has offset to some extent the fall in domestic demand but with all of the US's major markets now heading into recession this demand driver will also dry up.

 

[Greg Bernhardt]

WM and AIG are toast! Citi on the way.

 

[mheslep]

Lehman Expected to File for Bankruptcy - Unbelievable!

Here's another bankruptcy prediction: one of the big three automakers will go under by '10.

 

[Astronuc]

Here's another bankruptcy prediction: one of the big three automakers will go under by '10.

Could happen.

All three automakers have gone to Washington looking for assistance - because the government ordered them to build more fuel efficient cars. Ummm - no - the market changed when gasoline hit $4/gal. The Big 3 from Detroit are concerned that they cannot arranged financing to retool for the upcoming year.


But according to McCain, who has been parroting GW Bush, the economy's fundamentals are strong. Boulderdash!

"The fundamentals of our economy are strong, but these are very, very difficult times and I promise you we will never put America in this position again," McCain told a rally in Jacksonville in the electoral battleground state of Florida.

McCain, Obama promise Wall Street overhaul
http://news.yahoo.com/s/nm/20080915/pl_nm/usa_politics_dc_4


The economy is overleveraged based on overvalued collateral. And has been for some time.

The government is accruing debt and future obligations and will reach a point where it cannot meet obligations, unless dramatic changes occur. And that was before the dramatic drop in the real estate market devaluation and current downturn in the financial markets.

And it appears that AIG is in trouble, unless they can secure the $40 billion.

 

[mheslep]

...Not at all, you are confusing financial crisis with economic crisis though it is likely the former will lead to the latter. It was the financial crisis of 1929 that led to the Great Depression of 1933 ...

The financial situation today, just the financials if you like, does not compare by magnitude in any significant indicator to '29/'30, nor did Chairman Greenspan say such a thing. 9000 banks failed in the 30's. 1000-2000 banks failed in the '90s S&L crisis. As of August, 8 US banks had failed this year, no doubt there will be more until home prices reach level off, but good grief look at the scale.
www.reuters.com/article/ousiv/idUSN0136691620080802
http://www4.fdic.gov/hsob/HSOBSummaryRpt.asp?BegYear=1934&EndYear=2007&State=1

 

[Art]

The financial situation today, just the financials if you like, does not compare by magnitude in any significant indicator to '29/'30, nor did Chairman Greenspan say such a thing. 9000 banks failed in the 30's. 1000-2000 banks failed in the '90s S&L crisis. As of August, 8 US banks had failed this year, no doubt there will be more until home prices reach level off, but good grief look at the scale.
www.reuters.com/article/ousiv/idUSN0136691620080802
http://www4.fdic.gov/hsob/HSOBSummaryRpt.asp?BegYear=1934&EndYear=2007&State=1

First the financial landscape has totally changed with far fewer but much bigger banks these days rendering a numerical comparison totally meaningless. Secondly your view is far too parochial. It is not just US financial markets in trouble. The downside to globalisation is trouble spreads like lightning. There are banks all over Europe and the rest of the industrialised world in deep trouble.

In England for the first time in over 100 years there was a run on a bank, Northern Rock, which necessitated the gov't nationalising it. To keep other banks from getting into the same trouble the EU central bank has been pouring billions into the financial system but so far this has only allowed banks to thread water with the funds being used to plaster over holes in balance sheets rather than for increasing liquidity which was their supposed intent.

Here is a very prescient article written in 2003 which forecasted the collapse of the credit bubble with a good explanation of how it developed and where it would lead

The coming first world debt crisis

On a global level, there is $100 trillion of debt outstanding, but only $33 trillion of income with which to repay those debts.

http://www.opendemocracy.net/globalization-americanpower/article_1463.jsp

 

[Gokul43201]

Meaning what, sarcasm aside? That I said everything is fine, no worries? Not here.

Agreed. I was just being a little silly.

And as for this...

Looks like it's less than 2%, right now.

Correction. Make that less than 0.5%.

 

[Greg Bernhardt]

S&P downgrade on AIG to negative credit watch. Very bad news. Another 3 digit down day tomorrow.

 

[Art]

S&P downgrade on AIG to negative credit watch. Very bad news. Another 3 digit down day tomorrow.

It seems the Fed won't help them but J P Morgan and Goldman might. They are looking for $70-75 billion in loans to shore up their balance sheet!

AIG Seeks Funds From JPMorgan, Goldman After Fed Balks at Loan

By Hugh Son

Sept. 15 (Bloomberg) -- American International Group Inc., the biggest U.S. insurer by assets, may be propped up by $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co., according to people familiar with the situation.

The Federal Reserve urged AIG to seek private capital and discouraged the insurer from expecting a loan from the central bank, according to two people with knowledge of the discussions. Goldman and JPMorgan are working with AIG to determine how much the New York-based insurer needs, said two more people, all of whom declined to be identified because negotiations are private.

Wall Street's biggest firms are working together to avoid a failure at AIG, which sold the banks and other investors protection on $441 billion of fixed-income assets, including $57.8 billion in securities tied to subprime mortgages. The companies convened at the New York Fed for a fourth consecutive day, this time to discuss AIG, which plunged 61 percent today in New York trading.

``I don't know of a major bank that doesn't have some significant exposure to AIG,'' said Kenneth Lewis, chief executive officer of Bank of America Corp., in a CNBC interview. An AIG collapse would ``be a much bigger problem than most that we've looked at.''

http://www.bloomberg.com/apps/news?pid=20601103&sid=aO.ypWiGjrAU&refer=us

Edit - seems they've got themselves some breathing space with the gov't allowing them to borrow 20 billion from their subsidiaries.

 

[edward]

Could happen.

All three automakers have gone to Washington looking for assistance - because the government ordered them to build more fuel efficient cars. Ummm - no - the market changed when gasoline hit $4/gal. The Big 3 from Detroit are concerned that they cannot arranged financing to retool for the upcoming year.

Auto dealerships are struggling to make a profit when they have to take gas guzzler trade ins. If they low ball the trade in, which they need to do with a gas guzzler, they don't make the sale.

My son is the GM of a Honda dealership. They have a demand for fuel efficient vehicles, but a lot of people are either driving a gas guzzler SUV, or are upside down on their existing loans and sometimes both.

OMG I just admitted that my son is a car salesman.

But according to McCain, who has been parroting GW Bush, the economy's fundamentals are strong. Boulderdash!

If he repeats it often enough it will be true. It worked for Bush and Iraq.

The economy is overleveraged based on overvalued collateral. And has been for some time.

The government is accruing debt and future obligations and will reach a point where it cannot meet obligations, unless dramatic changes occur. And that was before the dramatic drop in the real estate market devaluation and current downturn in the financial markets.

And it appears that AIG is in trouble, unless they can secure the $40 billion.

This current economic situation has a definite potential to snowball out of control. I have lived through several recessions and the Savings and loan debacle. Through it all I have never seen the failure of major financial institutions become so extensive.

Last night the Federal Reserve asked JPMorgan Chase and Goldman Sachs to organise loans of up to $75 billion for AIG, while New York State officials struck a deal allowing the insurer to borrow $20 billion of capital from its own subsidiaries.

http://business.timesonline.co.uk/t...ectors/banking_and_finance/article4761839.ece

 

[Art]

OMG I just admitted that my son is a car salesman.

Worse! He's selling Japanese imports!

 

[Astronuc]

Worse! He's selling Japanese imports!

Actually many Honda cars are made in the US.

Here's the great piece on Phil Gramm and his role in the current debacle, and what might be in store if McCain becomes president and Gramm becomes Sec. of Treas.

R.I.P.: 'Reaganomics Revolution' 1981-2011
How Gramm's three meltdowns sabotage America's conservative principles

ARROYO GRANDE, Calif. (MarketWatch) -- "All the world's a stage, and all the men and women merely players, they have their entrances and their exits." Two years ago conservatives predicted a "permanent majority" lasting "for years, maybe decades." No exit. But the hubris gods had other plans.

Now the "final act" of the Reagan Revolution's glory days is being scripted, in grand Shakespearean style, not for 2008 but in 2011.

. . . Oddsmakers now favor McCain, so the final act of the Reagan Revolution may indeed be delayed four years.

Why? If McCain wins the betting gods favor former Texas Sen. Phil Gramm, McCain's chief economic adviser, as the new Secretary of the Treasury. Yes, the same Gramm who recently dismissed the subprime-housing meltdown as a "mental recession" in the minds of America's "whiners."
. . . .

Gramm as Reaganomics' inner 'wrecking crew'
In a McCain presidency Gramm will vastly increase the wreckage he's been foisting on the America economy for a long time. In June Stephen Moore interviewed Gramm in the Wall Street Journal: "For two decades the man who came to be called 'Dr. No' had earned a reputation as a one-man wrecking crew of big-government legislative priorities. ... The record confirms that Mr. Gramm played a decisive role in nearly every fiscal conservative victory in the 1980s and '90s -- from the Reagan budget and tax cuts to the Gramm-Leach-Bliley banking reforms," which in 1999 repealed the Glass-Steagall Act of 1933 that separated commercial and investment banking. That set the stage for America's current subprime-credit meltdown.

Why script Gramm's Treasury as a Shakespearean tragedy? Ask any lobbyist: Every election has less to do with who's president and everything to do with their cast of characters: They pick 20 cabinet officers as well as control 6,722 other senior bureaucrats running agencies like the FDA, FAA, SEC, CIA, Environmental Protection, Science and Technology, Economic Advisers. There's power in casting.

McCain will pick conservatives to extend the Reagan Revolution. Remember Cheney in the shadows, backstage dominating the current Reagan Revolution revival? In McCain's revival, much like Cheney, Gramm will "steal the show" till 2011 when his luck runs out because the Gramm "wrecking crew" will so distort Reaganomic principles beyond recognition, triggering his third meltdown, thus ending the great Reagan Revolution from within by one of its key disciples.

Yes, I said three meltdowns from the Gramm "wrecking crew." . . . .

1. Gramm, Enron and the dot-com meltdown 2000
. . . . . (You have to read about Wendy's involvement in Enron and her role in the collapse)

2. Gramm, UBS and the subprime meltdown 2007
. . . . .

3. Gramm and the U.S. Treasury meltdown of 2011 :rof: (only if McCain wins the election in Nov.)
. . . . .

And McCain promises to clean up Wall Street. With Palin?

 

[Astronuc]

S&P downgrade on AIG to negative credit watch. Very bad news. Another 3 digit down day tomorrow.

Interesting - AIG shares up 6.9% to $5.02 in evening trade. But - more downgrades:

Fitch Ratings downgrades AIG to 'A'
AM Best downgrades AIG

WaMu may be in trouble - S&P downgrades WaMu ratings to 'BB-/B' From 'BBB-/A-3'

Meanwhile on the Pacific markets:

Australia's S&P/ASX 200 edges down 1.1% to 4,764.20
Japan's Nikkei 225 dips 4.5% in early trading
Japan's Topix index down 5.4% to 1,113.31
New Zealand's NZX-50 sheds 2.9% to 3,224.49
South Korea's Kopsi falls 6.2% to 1,386.29

Lehman [LEH] to be taken off of S&P 500, to be replaced by Harris


H-P to take $1.7 billion charge for EDS acquisition
H-P to cut 24,600 jobs as part of EDS integration (about 7% of workforce)
H-P sees $1.8 billion in annual saving from EDS acquisition


The is a bright ray of sunshine piercing through the dark clouds.

J.M. Smucker to pay special dividend of $5 on Folger's deal. JMSmucker is a good company run by good management! It is a shining example of how a company should be run.


The news items are from this evenings Marketwatch.com news summaries.

 

[Astronuc]

BTW - over the last decade or two, there has been a fair amount of consolidation in the banking business. Many of our local banks have disappeared after being absorbed by the larger banks like JPMorgan Chase, BoA, HSBC, . . . . My regional bank was absorbed by Chase.

Rather than look at the number of little banks or S&Ls that go under, one has to look at the market capitalization that has just evaporated. Right now, it appears to be over $1 trillion (in the US financial markets alone), but the trails are so convoluted that it will take time to sort it out.

 

[Astronuc]

World Markets In Freefall After Wall Street's Plunge
http://www.npr.org/latestnews/#MT94658422

Asian stocks closed down sharply on Tuesday, but a bit of calm returned to Europe following on Wall Street's worst single-day performance since immediately after the September 11, 2001, terror attacks.

The Shanghai Composite Index closed at a near 2-year low, down 4.5% and South Korea's main index fell more than 6% With Tokyo's Nikkei 225 index sinking nearly 5 percent to 11,609.72 and Hong Kong's Hang Seng shedding 5.4 percent.

"Today was a bloodbath," according to an investment bank official specializing in the greater China region. He said "This was panic selling, with investors dumping shares to liquidate their positions" before they lose more.

. . . .
U.S. stock futures were down modestly, suggesting Wall Street could fall further Tuesday. Dow futures were down 38 points to 10,921.

Maybe it won't be as bad today as yesterday. But now the US economy is subject to the vagaries of the world economy, which is looking a little more unstable.

 

[Astronuc]

Lehman's Failure And Wall Street's Power Shift
http://www.npr.org/templates/story/story.php?storyId=94658937

One has to wonder - how deep are the pockets of Bank of America.


Fed Meets To Consider Interest Rate Cut
http://www.npr.org/templates/story/story.php?storyId=94658945

Morning Edition, September 16, 2008 · Federal Reserve officials meet Tuesday, and they may consider lowering interest rates in hopes of stabilizing Wall Street's fears. After Monday's heavy losses, market watchers will be hanging on the Fed's every move. David Wessel, economics editor at The Wall Street Journal, talks with Renee Montagne about the meeting and the latest developments on Wall Street.

Here's an interesting discussion on AIG. Is it too big to fail? Perhaps not.

http://marketplace.publicradio.org/display/web/2008/09/16/aig_q/

Scott Jagow: Here's what Treasury Secretary Henry Paulson had to say about Lehman:

Clip from Henry Paulson: I never once considered that it was appropriate to put taxpayer money on the line with, in resolving Lehman Brothers.

Enough is enough. Seems to be the sentiment. But now, we have insurance company AIG teetering. AIG might classify as "too big to fail," but would the government step in after letting Lehman go? We turn to Andrew Hilton, he's the head of an economic think tank in Britain. Andrew, you buying this concept of "too big to fail?"


--------------------------------------------------------------------------------

Andrew Hilton: It's possible that we will. After all, I think, most people did not expect the Treasury to let Lehman Brothers go under. I certainly didn't. I thought that Lehman Brothers would be bailed out. And the fact that the world hasn't come to an end after Lehman's gone to the wall, and the fact that Hank Paulson has apparently drawn a line and said no more public money, does suggest that they might be prepared to see AIG go under as well.

Jagow: But in terms of real fallout from this, what are you expecting?

Hilton: AIG is two companies. AIG is a large, but not dominant, insurance company, and it is also this sort of financial behemoth that's a major player in all sorts of sexy, very, very state-of-the-art derivatives markets. The insurance company is sound. And it will probably be hived off into a good insurance company or be taken over by somebody else. The financial behemoth, the financial engineering group, as it were, is full of toxic assets, and how that's going to be handled is going to be very, very tricky. But it need not necessarily spill over into the rest of the insurance sector. And to that extent, it may be that we can kind of quarantine it and liquidate it over a longer period.

Also, see Hilton's remarks on a global recession.

 

[Art]

With interest rates already so low the Feds room for manoeuvre is limited in that regard. Stopping short selling would seem to me the quickest and most effective way to stabilize the financial markets. At the moment a lesson should be taken from the limitations on free speech; there are a lot of people shouting fire in a crowded cinema creating panic.

 

[Astronuc]

While the Fed will consider reducing interest rates, the CPI increased, so that's puts pressure to keep interest rates at current levels, if not to raise them.

Consumer prices fall 0.1% on weaker energy prices
Core CPI up 0.2%, a sign of moderating inflationary pressures

With the decline in August, the CPI has risen 5.4% in the past year. The core rate has risen 2.5%, a little faster than the Federal Reserve would prefer.

Fortunately the price of oil is dropping.


Financial Russian Roulette
http://www.nytimes.com/2008/09/15/opinion/15krugman.html

To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the “shadow banking system.” Depository banks, the guys in the marble buildings, now play only a minor role in channeling funds from savers to borrowers; most of the business of finance is carried out through complex deals arranged by “nondepository” institutions, institutions like the late lamented Bear Stearns — and Lehman.

The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn’t so much reduced as hidden: all too many investors had no idea how exposed they were.

. . . . But the economic effects — a freezing up of credit, a downward spiral in asset values — are the same as those of the great bank runs of the 1930s.

Could it be that the defenses counted on to stabilize the economy are about to be overwhelmed, like Ike overwhelmed the seawall at Galveston?

 

[Astronuc]

A volatile market today - swinging on rumor and speculation - more so than usual.

U.S. stock indexes snap back on hopes for AIG
Banker: Fed's interest-rate decision pales in comparison to AIG resolution

NEW YORK (MarketWatch) -- U.S. stocks on Tuesday posted modest gains in afternoon trade as investors pegged hopes on reports the federal government might intervene to prevent a possible collapse of giant insurer American International Group Inc.

"It's the end of the world as we know it. We're now dealing with a problem that is probably much larger than we think. There is $1 trillion of assets in AIG. It's much bigger and much more profound than a broker dealer in New York. It will affect Main Street as well," said Marino Marin, managing director at Gruppo, Levey & Co.

The fear and uncertainty underlying the market will persist until the outcome at AIG is known, rendering the Federal Reserve's pending interest rate decision of little importance, said Marin, formerly a banker at Lehman Brothers. "It's not that relevant at this point whether they [central bankers] cut or not."

After sliding about 150 points early on, the Dow Jones Industrial was more recently up 43.48 points at 10,960.99, with 19 of its 30 components trading higher.

After lapsing to a low of $1.25 a share earlier on, AIG was recently trading at $2.84 a share, down $1.92, or 40.1%.

If the Fed or Treasury intervene, then they need to put harsh penatlies on AIG, e.g. the profits go into the Treasury for the next decade or so.

The Bush Administration should not be rewarding the failure of fiduciary responsibility by using taxpayer money to bailout these companies. Those who gambled and lost must suffer the consequences.

IMO, the Fed/Treasury should not intervene.

 

[Greg Bernhardt]

Discussion moved here:
https://www.physicsforums.com/showthread.php?p=1875925